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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF1934 [NO FEE REQUIRED]
For the transition period ________ to ________
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its chart er)
Delaware 75-2543540
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
3847 East Loop 820 South
Fort Worth, Texas 76119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 496-4414
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, par value $.0024 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of
the registrant was approximately $2,974,221 at March 10, 2000. At that date
there were 9,873,161 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 24, 2000, are incorporated by
reference in Part III of this report.
Forward-Looking Statements
This report contains forward-looking statements of management. There
are certain important risks that could cause results to differ materially than
those anticipated by some of the forward-looking statements. Some, but not all,
of the important risks which could cause actual results to differ materially
from those suggested by the forward-looking statements include, among other
things,
o changes from anticipated levels of sales, whether due to future national or
regional economic and competitive conditions, including, but not limited
to, retail craft buying patterns, and possible negative trends in the craft
and western retail markets,
o customer acceptance of existing and new products, or otherwise, pricing
pressures due to competitive industry conditions,
o increases in prices for leather (which is a world-wide commodity),
o change in tax or interest rates,
o change in the commercial banking environment,
o inability of the Company's significant trading partners to identify all Y2K
issues,
o problems with the importation of the products that the Company buys in 22
countries around the world, including, but not limited to, transportation
problems or changes in the political climate of the countries involved,
including the maintenance by these countries of Most Favored Nation status
with the United States of America, and
o other uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company.
The Company does not intend to update forward-looking statements.
2
PART I
Item 1. Business.
As used in this Report, the terms "we," "us," "our," "TLF,"
"management," and the "Company" mean The Leather Factory, Inc. and its
subsidiaries (unless the context indicates a different meaning).
General. The Leather Factory, Inc. ("TLF" or the "Company") is a
Delaware corporation whose common stock trades on the American Stock Exchange
under the symbol "TLF."
TLF is an international wholesale manufacturer and distributor of a
broad product line of leather, leatherworking tools, buckles and other belt
supplies, shoe care and repair supplies, leather dyes and finishes, adornments
for belts, bags, and garments, saddle and tack hardware, and do-it-yourself
leathercraft kits. We also introduced small finished leather goods such as cigar
cases, wallets and western accessories into our line several years ago. The
Company, through its subsidiary, Roberts, Cushman & Company, Inc. ("Cushman"),
produces and sells a related product line of hat trims (the decorative piece of
material that adorns the outside of a hat). The Company frequently introduces
new products either through its own manufacturing capability or by purchasing
from vendors. The Company holds a substantial number of copyrights for its
designs. These designs have been incorporated throughout the Company's product
line as a means of increasing its competitive advantage.
The Company's customer base is comprised of over 40,000 customers
including individuals, institutions, retailers, wholesalers, assemblers,
distributors, and other manufacturers dispersed geographically throughout the
world. Most of our customers are wholesalers, while retail sales have
historically comprised less than 10% of the Company's sales. In 1999, however,
we saw the sales mix shift somewhat to an 85% wholesale, 15% retail mix, and we
expect this increase in retail sales to continue during 2000 as we earn more and
more of the business of the former Tandycrafts retail customers. See also,
"Competition." Sales of the Company's products do not reflect significant
seasonal patterns.
The Company primarily distributes its products through 26
sales/distribution units ("Units") located in nineteen states and Canada plus
its manufacturing facility and show room in New York. The location of these
Units is selected based on the location of its customers, so that delivery time
to customers is minimized. A two-day maximum delivery time is the Company's
goal. In addition to offering its customers rapid delivery, the Company also
offers a "one-stop shopping" concept for both leather and leathercraft
materials. These Units service customers through various means including walk-in
traffic, phone and mail order. Both wholesale and retail customers purchase from
Units. These same Units also service the Authorized Sales Centers (discussed
below) as well as the craft, western and other retail establishments located in
close geographic proximity.
Our Authorized Sales Center ("ASC") program was developed to generate
sales in geographical areas that we currently do not have a sales/distribution
unit without outlaying the capital needed to open a unit. An unrelated person
who desires to become an ASC must apply with the Company and upon approval,
place a minimum initial order. There are also minimum annual purchase amounts
set that the ASC must adhere to in order to maintain ASC status. In exchange,
the ASC gets free advertising in certain sale flyers, price breaks on many
products, advance notice of new products, priority shipping and handling on all
orders, as well as various other benefits.
3
TLF operates two manufacturing facilities - one in Fort Worth, Texas,
that primarily manufactures product (suede lace, garment fringe, leathercraft
and craft-related kits) that is sold through the Units, and one in Long Island
City, NY (Cushman), that sells its product directly to hat manufacturers. We
also purchase products from other manufacturers and distributors in twenty-two
countries.
The Company was first incorporated under the laws of the State of
Colorado in 1984 and reincorporated under the laws of the State of Delaware in
June 1994. The Company's principal offices are located at 3847 East Loop 820
South, Fort Worth, Texas 76119 and its phone number is (817) 496-4414.
Operating Results. The Company's strategic efforts to improve
profitability significantly increased gross profit margins from 43.9% in 1998 to
an all-time high of 45.1% in 1999. Net sales for 1999 were $27,164,399, up
$5,000,405 (22.5%) from fiscal 1998 while operating expenses in 1999 increased
by $1,456,375 due to the increase in sales. These expenses dropped as a
percentage of sales by 2.0% over 1998. The dramatic improvement in profitability
resulted primarily from:
(1) sales gains primarily due to increase in market share in the retail
leathercraft market,
(2) the beginning signs of renewed interest in the craft and western
markets, and
(3) the opening of several new sales units in 1999.
The results of operations in 1998 were somewhat disappointing even
though gross profit margins showed improvement and operating expenses decreased
over the prior year. During 1998, total sales were $22,163,994 while operating
expenses were $8,890,045. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Operating results for the fourth quarter of 1999 revealed even better
results in operating profit margins compared to the total year. Fourth quarter
1999 revenues were up 39.9% from the same period last year, and gross profits
were up 50.9%. Operating costs were up 23.7% from the fourth quarter of 1998 due
to the significant increase in sales; however, operating costs as a percentage
of sales decreased 4.7%.
Corporate History. The Company is the successor to certain entities
that were parties to a series of transactions including a merger in July 1993
which involved The Leather Factory, Inc., a Texas corporation ("TLF-Texas"), and
National Transfer & Register Corp. ("National"), a Colorado corporation, which
had no operations and whose capital stock was widely held but had no active
trading market prior to the merger. The surviving entity changed its name to The
Leather Factory, Inc. and its business became that conducted by TLF-Texas. In
the following year, the Company reincorporated in Delaware.
As part of its strategy to develop a multi-location chain of wholesale
units the Company has made numerous acquisitions since its incorporation,
including the purchase of six wholesale units from Brown Group, Inc., a major
footwear retailer. The Company has also acquired several businesses located
throughout the United States that distribute shoe-related supplies to the shoe
repair and shoe store industry. In addition, the Company purchased Cushman in
1995, a leading producer of hat trims. In March of 1996, the Company acquired
all of the issued and outstanding capital stock of its Canadian distributor, The
Leather Factory of Canada, Ltd.
4
Business Strategy. The Company operates through 26 Units described
above that are designed to combine the economies of scale of warehouse locations
with the marketing efficiencies that can be achieved through direct mail.
Walk-in traffic and mail order customers are served from the same location. The
type of premises utilized for the Unit locations is generally light industrial
office/warehouse space in proximity to a major freeway or with other similar
access. This kind of location typically provides lower rental expense compared
to other more retail-oriented locations.
The size and configuration of the Units are planned to allow large
quantities of product to be displayed in an easily accessible and visually
appealing manner. Leather is displayed by the pallet where the customer can see
and touch it, assessing first-hand the numerous sizes, styles, and grades of
leather and leather goods. The Company maintains higher inventories of certain
imported items to ensure a continuous supply.
The Company's Units are staffed by experienced managers who are
primarily compensated based upon the operating profit of their location. Sales
from the Units are generated by the selling efforts of the location personnel
themselves, participation by the Company at trade shows, the use of sales
representative organizations and the aggressive use of direct mail advertising.
In addition to generating mail order business, the purpose of the Company's
direct mail program is to stimulate sales for the Units. The Company utilizes an
internally developed and maintained mailing list, which allows for very targeted
mailing to its various customer groups. As for the utilization of direct mail
and rapid delivery, the Company locates Units in order to get merchandise in the
customers' hands as soon as possible, with the added benefit of lower freight
cost.
The Company attempts to maintain the number of stock-keeping units
("SKU's") in the primary Leather Factory line of merchandise at the optimum
number of items necessary to balance the maintaining of the proper stock to
minimize out-of-stock situations with the carrying costs involved with such an
inventory level. The number of SKU's has been refined over the years by the
introduction of new products and the discontinuing of selected products. The
Company maintains approximately 2,800 items in the current line of merchandise.
Competition. The Company sells its products in three highly fragmented
markets, which include leathercraft, leather accessories, and retail craft.
Management believes that the Company encounters competition in connection with
certain product lines and in certain areas from different companies, but has no
direct competition affecting the entire product line. The Company is larger than
most of its direct competitors. The fragmented nature of these markets is the
primary reason for the lack of broad-based competition.
On January 8, 1999, Tandycrafts, Inc., the Company's most significant
competitor, announced plans to close its leather and crafts manufacturing
operations and 121 retail stores. As a result of the Tandycrafts decision, the
Company has experienced tremendous growth in some markets. See also "Expansion
and Acquisition Strategy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company competes on price, availability of merchandise, and speed of
delivery. The size of the Company relative to most of its competitors creates
competitive advantage in its ability to stock a full range of products as well
as in buying merchandise. The Company believes it has a competitive advantage on
price in most product lines because it purchases in bulk and has an
international network of suppliers that can provide quality merchandise at lower
costs. Most of the Company's competitors do not have the multiple sources of
supply and cannot purchase sufficient quantities to compete along a broad range
of products. In fact, some of the Company's competitors are also customers,
relying on the Company as a supplier.
5
Expansion and Acquisitions. In 1997 and 1998, management focused on
stabilizing operations and obtaining long-term financing, and no acquisitions
were made. As a result of the improving operating results and the opportunities
created by Tandycrafts' announced closing of its 121 retail stores, the Company
opened four new Units during 1999. The Company plans to continue its expansion
by: (i) adding two to three Units per year, as and when such additions are
determined feasible; and (ii) acquiring companies in related areas/markets which
offer synergistic aspects based on the locations and/or product lines of the
businesses.
The Company's acquisition of businesses involved in the distribution of
shoe care and repair supplies have been only marginally profitable because of
competitive pressures. The Company believes that it can no longer profitably
acquire businesses that sell shoe care and repair supplies as a means of gaining
a new Leather Factory location as it has several times in the past. The Company
has determined that it is better to open new locations than to purchase these
existing shoe-related businesses.
Products/Customers. The Company's core business consists of
manufacturing, importing and distributing leather, traditional leathercraft
materials (do-it-yourself kits, stamping sets, and leatherworking tools),
craft-related items (leather lace, beads, and wearable art accessories),
hardware, metal garment accessories (belt buckles, belt buckle designs, and
conchos), fancy hat trims in braids, leather, and woven fabrics, shoe care and
repair supplies, leather finishes, and small finished leather goods.
The products manufactured in Fort Worth generally involve cutting
leather into various shapes and patterns using metal dies ("clicking"),
fabrication, assembly, and packaging/repackaging tasks. Items made in Fort Worth
are primarily for wholesale distribution using the Company's sales/distribution
units. The Cushman facility manufactures hat trims and small finished leather
goods. Hat trims are sold to hat manufacturers and distributors directly. Small
finished leather goods are sold to various distributors and retailers through
attendance at trade shows and the use of sales representatives.
The customer groups served include wholesale distributors, tack and
saddle shops, shoe-findings customers, institutions (prisons and prisoners,
schools, hospitals), dealer stores, western stores, craft stores and craft store
chains, hat manufacturers and distributors, other large volume purchasers,
manufacturers, and retailers. No single customer's purchases represent more than
10% of the Company's total sales. Approximately five percent (5%) of the
Company's sales are export sales.
Suppliers. The Company currently purchases merchandise and raw
materials from approximately 200 vendors dispersed throughout the United States
as well as in twenty-one foreign countries. In fiscal year 1999, the Company's
ten largest vendors accounted for approximately fifty nine percent (59%) of its
total purchases. Management believes that its relationships with suppliers are
strong and does not anticipate any material changes in these supplier
relationships in the future. Due to the number of alternative sources of supply,
the loss of any or all of these principal suppliers would not have a material
impact on the operations of the Company.
6
Patents and Copyrights. The Company presently owns 130 copyrights
covering 239 registered works, seven trademarks covering seven names, and two
patents covering three products. Registered trademarks include a federal trade
name registration on The Leather Factory. The trademarks expire at various times
starting in 2002 and ending in 2008, but can be renewed indefinitely. Most
copyrights granted or pending are on metal products, such as conchos, belt
buckles, etc., and instruction books. The expiration period for the copyrights
begins in 2062 and ends in 2072. The Company has patents on two belt buckles and
certain leather-working equipment known as the "Speedy Embosser." The patents
expire in 2011. Management considers these intangibles to be valuable assets and
defends them as necessary.
Compliance With Environmental Laws. Compliance by the Company with
federal, state and local environmental protection laws has not had, and is not
expected to have, a material effect upon capital expenditures, earnings or the
competitive position of the Company.
Employees. As of December 31, 1999, the Company employed 236 people,
with 232 on a full- time basis. The Company is not a party to any collective
bargaining agreement. Eligible employees participate in The Leather Factory,
Inc. Employees' Stock Ownership Plan and Trust ("ESOP"). As of December 31,
1999, 156 employees and former employees were participants in or beneficiaries
of the ESOP. The Company has the option of contributing up to 15% of eligible
employees' compensation into the ESOP. Net contributions for 1999, 1998 and 1997
were 5.6%, 11.6%, and 1.2%, respectively, of eligible compensation. These
contributions are used to purchase shares of the Company's Common Stock.
Generally, contributions to the ESOP follow a similar pattern as overall
profitability. On January 21, 1999, the Company made an additional contribution
to the Plan (for the 1998 plan year) of $262,000 in order for the ESOP to pay
the entire balance owed on securities acquisition loans. Without the additional
contribution, the 1998 net contribution percentage would have been 3.7%.
Overall, management believes that relations with employees are good.
7
Item 2. Properties.
The Company leases all its premises. Detailed below are the lease terms
for the Company's locations. The general character of each location is light
industrial office/warehouse space. The Company believes that all of its
properties are adequately covered by insurance.
Location Name Total Space (Sq. Ft.) Minimum Annual Rent * Lease Expiration
------------- --------------------- ------------------- ----------------
Chattanooga, TN 9,040 $ 42,332 May 2004
Denver, CO 5,879 30,000 September 2004
Harrisburg, PA 6,850 37,352 March 2002
Fort Worth, TX 61,000 241,965 March 2003
Fresno, CA 5,600 42,336 March 2002
Des Moines, IA 4,000 30,718 April 2004
Phoenix, AZ 4,500 25,729 March 2001
Springfield, MO 6,000 24,000 July 2003
Spokane, WA 5,400 21,360 February 2004
Albuquerque, NM 5,000 30,000 October 2003
Salt Lake City, UT 4,373 21,600 July 2004
Baldwin Park, CA 7,800 53,400 March 2000
Tampa, FL 5,238 38,487 January 2003
San Antonio, TX 5,600 40,320 October 2001
Columbus, OH 6,000 39,075 October 2000
El Paso, TX 5,000 25,700 August 2003
Oakland, CA 8,000 54,000 December 2003
Grand Rapids, MI 8,000 40,774 March 2004
Wichita, KS 5,150 21,360 May 2004
New Orleans, LA 5,130 21,600 August 2000
Portland, OR 5,232 23,756 April 2004
Charlotte, NC 6,202 24,188 February 2001
Billings, MT 2,600 11,100 April 2001
Austin, TX 3,800 12,000 Month to month
Tucson, AZ 3,600 20,412 May 2004
Long Island City, NY 10,200 67,888 June 2003
Winnipeg, Canada 5,712 16,610** November 2002
-------- --------------
Totals 210,272 $ 1,058,062
======== ==============
- -----------
* Represents the average minimum annual rent over the balance of the unexpired
lease term.
** As converted into U.S. dollars.
8
The Company's Fort Worth location includes the Fort Worth Unit, the
Company's central warehouse, the light manufacturing facility, and the sales and
administrative/executive offices. The Company also leases a 284 square foot
showroom in the Denver Merchandise Mart for $4,896 per year. This lease will
expire in October 2002.
Item 3. Legal Proceedings.
As reported previously, the Company, as successor-in-interest to
National, was a defendant in a lawsuit brought in July 1994 by Gary A. Bedini
and John C. Bedini in the United States District Court for the District of
Colorado. The Company (as part of a reverse merger transaction with National)
was contractually indemnified against loss in this case by one of the additional
defendants, Securities Transfer Corporation and certain related entities and
individuals.
On November 9, 1998, this lawsuit was settled without any loss or
expense to the Company.
The Company is involved in litigation in the ordinary course of its
business but is not currently a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the Company's fiscal year ended December
31, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock of the Company is traded on the American Stock
Exchange using the symbol TLF. The high and low prices for each calendar quarter
during the last two fiscal years are as follows:
1998 1999
---- ----
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31, 0.6250 0.4375 0.8750 0.2188
June 30, 0.6250 0.3750 0.7500 0.3750
September 30, 0.6250 0.3750 0.7500 0.5625
December 31, 0.4375 0.1250 1.1250 0.8125
- -------------------------------------------------
There were approximately 629 stockholders of record on March 10, 2000.
There have been no cash dividends paid on the shares of the Company's
Common Stock and currently dividends cannot be declared or paid without the
prior written consent of Wells Fargo Business Credit, Inc., the Company's
lender. The Board of Directors has historically followed a policy of reinvesting
the earnings of the Company in the expansion of its business. This policy is
subject to change based on future industry and market conditions, as well as
other factors beyond the control of the Company.
9
Item 6. Selected Financial Data.
The selected financial data presented below are derived from and should be
read in conjunction with the Company's Consolidated Financial Statements and
related notes. This information should also be read in conjunction with Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Data in prior years have not been restated to reflect acquisitions
that occurred in subsequent years.
Income Statement Data Years Ended December 31,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ---------------- --------------- --------------- ---------------
Net sales $27,164,399 $22,163,994 $25,399,116 $28,253,632 $31,447,849
Cost of sales 14,907,768 12,428,324 14,844,376 17,689,973 18,446,378
--------------- ---------------- --------------- --------------- ---------------
Gross profit 12,256,631 9,735,670 10,554,740 10,563,659 13,001,471
Operating expenses 10,346,420 8,890,045 9,365,673 10,869,359 10,363,159
--------------- ---------------- --------------- --------------- ---------------
Operating income (loss) 1,910,211 845,625 1,189,067 (305,700) 2,638,312
Other (income) expense 900,304 970,340 887,543 1,000,604 678,264
--------------- ---------------- --------------- --------------- ---------------
Income (loss) before income taxes 1,009,907 (124,715) 301,524 (1,306,304) 1,960,048
Income tax provision (benefit) 574,851 (85,524) 231,232 (316,536) 786,744
--------------- ---------------- --------------- --------------- ---------------
Net income (loss) 435,056 (39,191) 70,292 (989,768) 1,173,304
=============== ================ =============== =============== ===============
Earnings (loss) per share 0.04 (0.00) 0.01 (0.10) 0.12
=============== ================ =============== =============== ===============
Earnings (loss) per share--
assuming dilution 0.04 (0.00) 0.01 (0.10) 0.12
=============== ================ =============== =============== ===============
Weighted average common
shares outstanding for:
Basic EPS 9,853,161 9,803,887 9,789,358 9,788,530 9,789,468
=============== ================ =============== =============== ===============
Diluted EPS 9,890,098 9,803,887 9,791,565 9,788,530 9,789,468
=============== ================ =============== =============== ===============
Balance Sheet Data As of December 31,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ---------------- --------------- --------------- ---------------
Total assets $18,220,775 $16,029,937 $17,024,549 $18,264,547 $19,333,376
--------------- ---------------- --------------- --------------- ---------------
Notes payable and current
maturities of long term debt 6,061,735 6,139,327 4,650,742 8,549,366 1,296,359
--------------- ---------------- --------------- --------------- ---------------
Notes payable and long-term
debt, net of current maturities 121,686 61,389 2,602,728 17,378 6,566,809
--------------- ---------------- --------------- --------------- ---------------
Total Stockholders' Equity 8,680,425 8,170,278 8,132,646 8,022,937 9,282,305
=============== ================ =============== =============== ===============
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Income Statement Comparison
The following table sets forth, for the fiscal years indicated, certain
items from the Company's Consolidated Statements of Income expressed as a
percentage of net sales:
1999 1998 1997
-------------- -------------- ---------------
Net Sales 100.0% 100.0% 100.0%
Cost of sales 54.9 56.1 58.4
-------------- -------------- ---------------
Gross profit 45.1 43.9 41.6
Operating expenses 38.1 40.1 36.9
-------------- -------------- ---------------
Operating income (loss) 7.0 3.8 4.7
Other (income) expense, net 3.3 4.4 3.5
-------------- -------------- ---------------
Income (loss) before
income taxes 3.7 (0.6) 1.2
Income tax provision (benefit) 2.1 (0.4) 0.9
-------------- -------------- ---------------
Net income (loss) 1.6 % (0.2) % 0.3%
============== ============== ===============
Analysis of 1999 Compared to 1998
1999 1998 $ Change % Change
-------------- --------------- -------------- --------------
Net sales $27,164,399 $22,163,994 $5,000,405 22.56%
Cost of sales 14,907,768 12,428,324 2,479,444 19.95%
-------------- --------------- --------------
Gross profit 12,256,631 9,735,670 2,520,961 25.89%
Operating expenses 10,346,420 8,890,045 1,456,375 16.38%
-------------- --------------- --------------
Operating income (loss) 1,910,211 845,625 1,064,586 125.89%
Other (income) expense 900,304 970,340 (70,034) (7.21%)
-------------- --------------- --------------
Income (loss)
before income taxes 1,009,907 (124,715) 1,134,622 N/A
Income tax provision (benefit) 574,851 (85,524) 660,375 N/A
-------------- --------------- --------------
Net income (loss) $ 435,056 $ (39,191) $ 474,247 N/A
============== =============== ==============
Revenues
The Company experienced encouraging growth in net sales during 1999 primarily
due to the absorption of a portion of Tandycrafts' abandoned market share and
the early signs of renewed interest in the western apparel and craft markets. In
addition, we opened four new sales/distribution units in 1999, located in
Portland, OR, Billings, MT, Austin, TX, and Tucson, AZ. It has been our
11
experience that the western and craft industries are subject to fads, to some
extent. Movies, entertainers, etc. have a great impact on the popularity of
western apparel in particular. The key to success in the craft industry,
oversimplifying of course, is being the first company with a popular idea -
whether it be wearable art, photo albums and scrapbook creations, etc. As a
result, the Company's success in selling to these two industries depends to a
point on the latest successful craft idea, what is popular at the box office, or
who won Entertainer of the Year. We believe we are seeing the beginnings of
these two industries' popularity on the rise.
Partially offsetting the sales increases in retail, western and craft markets
was the continued reduction of sales of certain low margin items. Because of the
historically low margins earned in our shoe care/repair product line, we
intentionally eliminated a large portion of the line. This reduced 1999 sales to
this industry by approximately $1 million from 1998. We compensated for this
reduction with the development and implementation of our new ASC program.
The ASC program began in April 1999, and as of December 31, 1999, we had
approximately 80 approved ASCs. In 1999, the ASCs generated sales of over
$900,000. We are pleased with the success of this program and anticipate
continued growth in 2000.
Sales in our institutional (prisons and prisoners, schools, hospitals, etc.) and
other core markets (saddle and tack, semi-professional hobbyists, small
manufacturers) are showing steady and positive growth trends as well.
Costs, Gross Profit, and Expenses
Cost of sales for 1999 totaled $14.9 million or 54.9% of sales. The percentage
increase over 1998 was 20%. The impact of this increase becomes evident when
compared to the 22.5% increase in sales. The 2.5% gain in gross profit to sales
in 1999 resulted in a gross profit percentage of 45.1% - the highest in the
Company's history - compared to 43.9% in 1998. The most significant factor
supporting this improvement is the increase in our retail business as retail
sales historically produce the highest profit margins. This year, we experienced
a 70% jump in retail sales from 1998.
Operating expenses increased $1.45 million or 16.4% compared to 1998. This
increase is a result of higher payroll costs resulting from higher sales, ESOP
contribution (management's desire to reward employees for the Company's
financial improvement), managers' bonuses as a result of higher profits earned
at the sales/distribution units, and professional fees.
Other (Income) Expense
Other expenses were down 7.2% from 1998. This reduction is primarily in interest
expense due to the decrease in average outstanding debt balances in 1999 as
compared to 1998.
Provision (Benefit) for Income Taxes
The provision for federal and state income taxes was 57% of 1999 income before
taxes due to $420,000 of non-deductible expenses, principally amortization of
goodwill. Without these non-deductible expenses, the Company's effective tax
rate approximates the Company's historical rate for combined federal, state and
local income taxes of 40%.
12
Analysis of 1998 Compared to 1997
1998 1997 $ Change % Change
-------------- --------------- -------------- --------------
Net sales $22,163,994 $25,399,116 $(3,235,122) (12.74%)
Cost of sales 12,428,324 14,844,376 (2,416,052) (16.28%)
-------------- --------------- --------------
Gross profit 9,735,670 10,554,740 (819,070) (7.76%)
Operating expenses 8,890,045 9,365,673 (475,628) (5.08%)
-------------- --------------- --------------
Operating income (loss) 845,625 1,189,067 (343,442) 28.88%
Other (income) expense 970,340 887,543 82,796 9.33%
-------------- --------------- --------------
Income (loss)
before income taxes (124,715) 301,524 (426,239) N/A
Income tax provision (benefit) (85,524) 231,232 (316,756) N/A
-------------- --------------- --------------
Net income (loss) $(39,191) $70,292 $(109,483) N/A
============== =============== ==============
Revenues
The Company's 1998 net sales decreased 12.7% to $22.2 million from
$25.4 million in 1997. The decline resulted from strategic decisions to
eliminate low margin items from the Company's product lines, reduced sales to
the western apparel and crafts markets, and lower export sales. Sales of lower
margin items (predominately our shoe care/repair line) were down 43% from 1997
and represented less than 8% of total revenues in 1998. Nearly half of the
Company's business is made up of sales to western apparel and crafts markets,
and 1998 sales in these markets were down 15% and 18%, respectively, compared to
1997, reflecting a continuation of negative industry trends. However, sales in
the Company's core businesses and institutional markets remained strong
throughout the year and registered an increase in revenues over 1997.
Costs, Gross Profit, and Expenses
Cost of sales for 1998 totaled $12.4 million or 56.1% of sales. The
comparable amount for 1997 was $14.8 million or 58.4%. The improvement in the
percentage was principally attributable to an improved product sales mix and the
Company's strategic efforts to selectively raise prices and eliminate lower
margin items from its product lines. As a result of the lower cost of sales
percentage, gross profit as a percentage of sales improved in 1998 to 43.9%
compared to 1997 of 41.6%.
Operating expenses decreased $476,000 or 5.1% to $8.9 million in 1998
from $9.4 million in 1997. Approximately half of the decrease in operating
expenses was the result of lower payroll costs, reflecting an additional
reduction of personnel during 1998. Other decreases included lower advertising
costs, reduced accounting, legal and professional fees, and lower freight costs.
Other (Income) Expense
Other expenses were $970,000 for 1998 compared to $888,000 during 1997.
Interest expense was up $136,000 in 1998 as the amortization of deferred costs
from the November 1997 debt refinancing offset reduced interest expense due to
lower borrowing levels during the year. Other income increased $53,000 relative
to 1997 due to a gain from the sale of a trademark in 1998 as opposed to a loss
recorded on the sale of real estate in Tampa, Florida in 1997.
13
Provision (Benefit) for Income Taxes
The benefit for income taxes was 69% of the loss before taxes in 1998.
The tax benefit reflects a deduction for a contribution to the Company's ESOP
for tax purposes in excess of its treatment in arriving at net income. This
amount is partly offset by certain non-deductible expenses totaling $228,000,
principally the amortization of goodwill. Taking these two amounts into account,
the Company's effective tax rate materially approximates the Company's
historical rate for combined federal and state income taxes of 40%.
Capital Resources and Liquidity
On November 19, 1999, the Company entered into a Credit and Security
Agreement with Wells Fargo Business Credit, Inc. ("WFBC"), in which WFBC agreed
to provide a credit facility of up to $8,650,000 (the "Credit Facility"). The
Credit Facility has a three-year term and is secured by all of the assets of the
Company. The initial borrowings from WFBC were used to pay all amounts due by
the Company to FINOVA Capital Corporation ("FINOVA") and The Schlinger
Foundation ("Schlinger") as discussed below.
The Company is currently in compliance with all covenants and
conditions contained in the Credit Facility and has no reason to believe that it
will not continue to operate in compliance with the provisions of these
financing arrangements. The principal terms and conditions of the Credit
Facility are described in further detail in Note 3 to the Consolidated Financial
Statements.
Prior to the relationship with WFBC, the Company had a Loan and
Security Agreement with FINOVA in which FINOVA agreed to provide a credit
facility of up to $9,136,000 in senior debt (the "Senior Debt Facility"). This
Senior Debt Facility was secured by all of the assets of the Company as well as
a pledge of 3,000,000 shares of the Company's common stock, par value $0.0024
("Common Stock"), collectively owned by two of the Company's executive officers.
The Company also had a $1,000,000 subordinated promissory note with Schlinger
(the "Subordinated Debenture") which was secured by a pledge of 2,666,666 shares
of the Company's Common Stock owned by another executive officer.
The primary sources of liquidity and capital resources during 1999 were
borrowings from the Debt Facilities with FINOVA and WFBC, and cash flows
provided by operating activities.
Cash flows from operations for 1999 were $236,000. The largest portion
of the operating cash flow was invested in inventory to meet demand from
increased sales.
Accounts receivable increased to $2.3 million and inventory increased
to $8.8 million at December 31, 1999 from $1,582,459 and $6,956,606,
respectively, at December 31, 1998. The aging of accounts receivable has
increased slightly from 1998. We believe that this trend is temporary and is a
result primarily of the speed at which receivables grew in a relatively short
period of time. We continue to maintain a rather tight credit and collection
policy and expect improved collection results in 2000.
Inventory turned 1.89 times during 1999, improving over the 1998 ratio
of 1.74 times. However, this turn rate is still below management's goals of over
2 turns per year. Management believes the 1999 rate would have been higher if we
had not intentionally raised the inventory levels in the last half of the year
to meet anticipated demand as the Tandycrafts' store closings were completed. In
December 1999, we completed the implementation of our new information system
which is proving to be very helpful in the monitoring of inventory levels as we
go forward.
14
Accounts payable increased to $1.8 million at December 31, 1999 from
$1.0 million at the end of 1998 due to the increase in inventory purchases and
the more favorable terms negotiated with certain vendors. The increase in
accounts payable created approximately $800,000 of operating cash flow for the
year to help offset the negative effect on cash flow due to the increase in
accounts receivable and inventory.
The Company's current ratio remained fairly constant at December 31,
1999 and 1998 (1.31 and 1.28, respectively). If, however, accounting rules had
not required the Company's debt with WFBC to be classified as short-term (even
though the maturity is in November 2002), the current ratio at December 31, 1999
would have been 3.49.
The largest use of cash beyond inventory, accounts receivable, and debt
payments in 1999 was for capital expenditures. Cash used for capital
expenditures totaled $254,000 and $138,000 for the years ended December 31, 1999
and 1998, respectively. Approximately 60% of 1999 capital spending was for new
computer equipment and software with the remainder split between office and
warehouse fixtures, machinery and other equipment, and leasehold improvements.
The Company's Credit Facility consists of a revolving credit facility
and one term note. The revolving portion is based upon the level of the
Company's accounts receivable and inventory. At December 31, 1999, the Company
had additional borrowing availability of approximately $500,000. Continued sales
increases and operations expansion will require larger investments in accounts
receivable and inventory. Management believes the current credit facility in
place with WFBC, combined with operating cash flow, will be adequate to fund
operation and expansion needs.
The Company borrows and repays funds under revolving credit terms as
needed. Principal balances at the end of each quarter during the facilities'
existence are shown below:
4th Qtr. `98 1st Qtr. `99 2nd Qtr. `99 3rd Qtr. `99 4th Qtr. `99
FINOVA FINOVA FINOVA FINOVA WFBC
------ ------ ------ ------ ----
$3,597,988 $3,481,246 $3,826,616 $4,714,428 $5,818,652
Total indebtedness with WFBC (revolving credit and one term loan) at
the end of 1999 and FINOVA (revolving credit and three term loans) and the
Subordinated Debenture at the end of 1998 are shown below:
December 31,
-----------------------------------------------------------------------------
1998 1999
-------------------------------------- -----------------------------------
Accrued Accrued
Principal Interest Principal Interest
WFBC
Revolving Line $5,818,652 $49,762
Term Loan 150,000 1,163
----------------- -------------
Subtotal 5,968,652 50,925
FINOVA
Revolving Line $3,597,988 $27,137
Term Loans 1,520,000 13,451
------------------ ----------------
Subtotal 5,117,988 40,588
Subordinated Debenture 1,000,000 11,194
------------------ ---------------- ----------------- -------------
TOTAL $6,117,988 $51,782 $5,968,652 $50,925
================== ================ ================= =============
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's Credit Facility includes loans with interest rates that
vary with changes in the prime rate. An increase of one percentage point in the
prime rate would not have a material impact on the Company's future earnings.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Financial Statement Schedule are filed as
a part of this report. See page 15, Index to Consolidated Financial Statements.
Item 9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
15
THE LEATHER FACTORY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Consolidated Balance Sheets at December 31, 1999 and 1998 .................................................... 17
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 ................... 18
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 ................... 19
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 ......... 20
Notes to Consolidated Financial Statements ................................................................... 21
Financial Statement Schedules for the years ended December 31, 1999, 1998 and 1997:
II - Valuation and Qualifying Accounts and Reserves ................................................. 31
All other schedules are omitted since the required information is not present or is not present in amounts
sufficient to require submission of the schedule or because the information required is included in the
consolidated financial statements and notes thereto.
Reports of Independent Auditors ............................................................................. 32-33
16
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1999 1998
------------------- -----------------
ASSETS
CURRENT ASSETS:
Cash $ 134,465 $ 510,399
Cash restricted for payment on revolving credit facility 317,904 232,838
Accounts receivable-trade, net of allowance for doubtful accounts of
$177,000 and $52,000 in 1999 and 1998, respectively 2,292,645 1,582,459
Inventory 8,807,963 6,956,606
Prepaid income taxes - 140,939
Deferred income taxes 160,165 190,012
Other current assets 533,841 239,157
------------------- -----------------
Total current assets 12,246,983 9,852,410
------------------- -----------------
PROPERTY AND EQUIPMENT, at cost 3,143,594 2,671,827
Less-accumulated depreciation and amortization (2,160,336) (1,813,378)
------------------- -----------------
Property and equipment, net 983,258 858,449
GOODWILL, net of accumulated amortization of $1,160,000
and $947,000 in 1999 and 1998, respectively 4,767,885 4,968,616
OTHER INTANGIBLES, net of accumulated amortization of
$45,000 and $299,000, in 1999 and 1998, respectively 191,048 316,626
OTHER assets 31,601 33,836
------------------- -----------------
$ 18,220,775 $ 16,029,937
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,805,918 $ 1,019,069
Accrued expenses and other liabilities 978,969 530,789
Income taxes payable 474,262 -
Notes payable and current maturities of long-term debt 6,061,735 6,139,327
------------------- -----------------
Total current liabilities 9,320,884 7,689,185
------------------- -----------------
DEFERRED INCOME TAXES 97,780 109,085
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 121,686 61,389
COMMITMENTS AND CONTINGENCIES (Note 6) - -
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 20,000,000
shares authorized, none issued or outstanding - -
Common stock, $0.0024 par value; 25,000,000 shares
authorized, 9,853,161 shares issued and outstanding 23,648 23,648
Paid-in capital 3,901,740 3,901,740
Retained earnings 4,930,434 4,495,378
Less: Notes receivable - secured by common stock (153,416) (224,750)
Accumulated other comprehensive loss (21,981) (25,738)
------------------- -----------------
Total stockholders' equity 8,680,425 8,170,278
------------------- -----------------
$ 18,220,775 $ 16,029,937
=================== =================
The accompanying notes are an integral part of these financial statements.
17
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------------- ---------------- -----------------
NET SALES 27,164,399 $ 22,163,994 $ 25,399,116
COST OF SALES 14,907,768 12,428,324 14,844,376
------------------- ---------------- -----------------
Gross profit 12,256,631 9,735,670 10,554,740
OPERATING EXPENSES 10,346,420 8,890,045 9,365,673
------------------- ---------------- -----------------
INCOME FROM OPERATIONS 1,910,211 845,625 1,189,067
OTHER INCOME (EXPENSE):
Interest expense (923,092) (1,003,649) (867,548)
Other, net 22,788 33,309 (19,995)
------------------- ---------------- -----------------
Total other income (expense) (900,304) (970,340) (887,543)
------------------- ---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES 1,009,907 (124,715) 301,524
PROVISION (BENEFIT) FOR INCOME TAXES 574,851 (85,524) 231,232
------------------- ---------------- -----------------
NET INCOME (LOSS) $ 435,056 $ (39,191) $ 70,292
=================== ================ =================
NET INCOME (LOSS) PER COMMON SHARE $ 0.04 $ (0.00) $ 0.01
=================== ================ =================
NET INCOME (LOSS) PER COMMON SHARE--Assuming Dilution $ 0.04 $ (0.00) $ 0.01
=================== ================ =================
The accompanying notes are an integral part of these financial statements.
18
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------------- ----------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 435,056 $ (39,191) $ 70,292
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation and amortization 567,452 527,443 523,551
(Gain) loss on sales of assets - (9,118) 46,950
Amortization of deferred financing costs 225,953 233,239 32,113
Other 13,426 (5,273) 17,995
Net changes in assets and liabilities:
Accounts receivable-trade, net (710,186) 282,817 82,422
Inventory (1,851,357) 323,096 457,618
Income taxes 615,201 57,031 252,488
Other current assets (294,684) 115,140 155,310
Accounts payable 786,849 77,023 1,497
Accrued expenses and other liabilities 448,180 (28,987) (37,231)
----------------- ----------------- ------------
Total adjustments (199,166) 1,572,411 1,532,713
----------------- ----------------- ------------
Net cash provided by operating activities
235,890 1,533,220 1,603,005
----------------- ----------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (254,274) (137,828) (239,578)
Proceeds from sales of assets - 10,000 257,306
(Increase) decrease in other assets 2,235 (2,934) 2,300
Other intangible costs (8,174) (1,728) (32,061)
----------------- ----------------- ------------
Net cash used in investing activities (260,213) (132,490) (12,033)
----------------- ----------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans 2,220,664 (432,531) (1,469,481)
Proceeds from notes payable and long-term debt 150,000 - 3,001,396
Payments on notes payable and long-term debt (2,605,453) (620,223) (3,083,189)
(Increase) decrease in cash restricted for payment on revolving credit facility (85,066) 86,295 (319,133)
Payments received on notes receivable - secured by common stock 71,334 32,867 11,688
Deferred financing costs incurred (103,090) (27,235) (149,949)
----------------- ----------------- ------------
Net cash used in financing activities (351,611) (960,827) (2,008,668)
----------------- ----------------- ------------
NET INCREASE (DECREASE) IN CASH (375,934) 439,903 (417,696)
CASH, beginning of year 510,399 70,496 488,192
----------------- ----------------- ------------
CASH, end of year $ 134,465 $ 510,399 $ 70,496
================= ================= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 697,996 $ 787,148 $ 749,472
Income taxes paid during the period, net of (refunds) (57,681) (117,609) (38,101)
NON-CASH INVESTING ACTIVITIES:
Computer equipment acquired under capital lease financing arrangements $ 217,493 $ - $ 129,108
The accompanying notes are an integral part of these financial statements.
19
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Common Stock Notes Accumulated
---------------------- receivable Other Unearned
Number Par Paid-in Retained - secured by Comprehensive ESOP
of shares value capital earnings common stock Income (Loss) shares Total
----------- --------- ----------- ----------- ------------ ------------- ------------ -----------
BALANCE, December 31, 1996 9,853,161 $23,648 $4,130,796 $4,464,277 $(269,305) $ (295) $(326,184) $8,022,937
Payments on notes
receivable -
secured by common stock - 11,688
- - - - 11,688 -
Allocation of suspended ESOP
shares committed to be 52,333 6,452
released - - (45,881) - - -
Warrants issued to acquire
100,000 shares of common 35,000 - - - - 35,000
stock - -
Net Income - 70,292
- - - 70,292 - -
Translation adjustment - - - - - (13,723) - (13,723)
----------- --------- ----------- ----------- ------------ -------------- ---------- -----------
BALANCE, December 31, 1997 9,853,161 $23,648 $4,119,915 $4,534,569 $ (257,617) $ (14,018) $(273,851) $8,132,646
Comprehensive income for the year ended December 31, 1997 (See table below.)
Payments on notes
receivable -
secured by common stock - - - - 32,867 - - 32,867
Allocation of suspended ESOP
shares committed to be
released - - (258,175) - - - 273,851 15,676
Warrants issued to acquire
200,000 shares of common
stock - - 40,000 - - - - 40,000
Net Loss - - - (39,191) - - - (39,191)
Translation adjustment - - - - - (11,720) - (11,720)
----------- --------- ----------- ----------- ------------ -------------- ---------- -----------
BALANCE, December 31, 1998 9,853,161 $23,648 $3,901,740 $4,495,378 $ (224,750) $ (25,738) $ - $8,170,278
Comprehensive loss for the year ended December 31, 1998 (See table below.)
Payments on notes
receivable -
secured by common stock - - - - 71,334 - - 71,334
Net Income - - - - - 435,056
435,056 -
Translation adjustment - - - - - 3,757 - 3,757
----------- --------- ----------- ----------- ------------ -------------- ---------- -----------
BALANCE, December 31, 1999 9,853,161 $23,648 $3,901,740 $4,930,434 $ (153,416) $ (21,981) $ - $8,680,425
==================================================================================================
Comprehensive income for the year ended December 31, 1999 (See table below.)
Comprehensive
Income (Loss)
--------------
BALANCE, December 31, 1996
Payments on notes
receivable -
secured by common stock
Allocation of suspended ESOP
shares committed to be
released
Warrants issued to acquire
100,000 shares of common
stock
Net Income 70,292
Translation adjustment (13,723)
BALANCE, December 31, 1997
-------------
Comprehensive income for the year ended December 31, 1997 $ 56,569
=============
Payments on notes
receivable -
secured by common stock
Allocation of suspended ESOP
shares committed to be
released
Warrants issued to acquire
200,000 shares of common
stock
Net Loss (39,191)
Translation adjustment (11,720)
BALANCE, December 31, 1998
-------------
Comprehensive loss for the year ended December 31, 1998 $(50,911)
=============
Payments on notes
receivable -
secured by common stock
Net Income 435,056
Translation adjustment 3,757
BALANCE, December 31, 1999
-------------
Comprehensive income for the year ended December 31, 1999 $435,813
=============
The accompanying notes are an integral part of these financial statements.
20
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND NATURE OF OPERATIONS
The Leather Factory, Inc. and subsidiaries (the "Company") is engaged in the
manufacture and distribution of a broad product line of leather, leather crafts
and finished goods, western apparel and related accessory items. The Company
operates sales/distribution units in 19 states and Canada. Numerous customers
including retailers, wholesalers, assemblers, distributors and other
manufacturers geographically disbursed throughout the world purchase the
Company's products. The Company also has light manufacturing facilities in Texas
and New York.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Inventory
The Company's inventory is valued at the lower of first-in, first-out cost or
market and consists of the following at December 31:
1999 1998
---- ----
Finished goods held for sale $7,629,995 $5,564,406
Raw Materials and work in process 1,177,968 1,392,200
--------- ---------
$8,807,963 $6,956,606
========== ==========
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense when incurred. The cost of assets retired or sold
and the related amounts of accumulated depreciation are removed from the
accounts, and any gain or loss is included in the statement of income.
Depreciation is determined using the straight-line method over the estimated
useful lives as follows:
Leasehold improvements 5-7 years
Equipment 5-10 years
Furniture and fixtures 5-7 years
Automobiles 5 years
Depreciation expense was $347,651; $308,568; and $303,867 for the years ended
December 31, 1999, 1998 and 1997, respectively.
21
Goodwill
Goodwill resulting from business purchases accounted for using the purchase
method of accounting is being amortized on a straight-line basis over estimated
useful lives ranging from ten to forty years.
The Company assesses the recoverability of goodwill by determining whether the
asset balance can be recovered over its remaining life through undiscounted
future operating cash flows of the acquired asset. The amount of impairment, if
any, is measured based on projected discounted future operating cash flows.
Amortization expense of $219,801 in 1999; $218,875 in 1998; and $219,684 in 1997
was recorded in operating expenses.
Advertising Costs
With the exception of catalog costs, advertising costs are expensed as incurred.
Catalog costs are capitalized and expensed over the estimated useful life of the
particular catalog in question, which is typically twelve to fifteen months.
Such capitalized costs are included in other current assets and totaled $29,635
and $17,809 at December 31, 1999 and 1998, respectively. Total advertising
expense was $1,040,671 in 1999; $908,432 in 1998; and $1,002,623 in 1997.
Revenue Recognition
Sales are recorded when goods are shipped to customers.
Income Taxes
Deferred income taxes result from temporary differences in the basis of assets
and liabilities reported for financial statement and income tax purposes.
Earnings Per Share
The Company computes earnings (loss) per share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128, Earnings
per Share ("SFAS 128"). SFAS No. 128 requires the disclosure of both "basic" and
"diluted" earnings per share. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding increased for potentially dilutive common shares outstanding during
the period. The dilutive effect of stock options, warrants and their equivalents
is calculated using the treasury stock method. Unearned shares held by the
Employees' Stock Ownership Plan are deemed not to be outstanding for earnings
per share calculations.
Accounting Estimates
The consolidated financial statements include estimates and assumptions made by
management that affect the reported amounts of assets and liabilities, the
reported amounts of revenues and expenses and the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Long-Lived Assets
The FASB has issued SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121 requires that
long-lived assets and certain identifiable intangible assets be reviewed for
impairment whenever events indicate that the carrying amount of an asset may not
be recoverable. The Company determined that as of December 31, 1999 and 1998, it
had no long-lived assets that met the impairment criteria of SFAS No. 121.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, establishes financial
accounting and reporting standards for stock-based employee compensation plans.
As permitted by SFAS No. 123, the Company has elected to continue to use
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25") and related Interpretations, in accounting for its stock
option plans.
22
Foreign Currency Translation
Foreign currency translation adjustments arise from activities of the Company's
Canadian operations. Results of operations are translated into U.S. dollars
using the average exchange rates during the period, while assets and liabilities
are translated using period-end exchange rates. Foreign currency translation
adjustments of assets and liabilities are recorded in stockholders' equity.
Comprehensive Income
Comprehensive income represents all changes in stockholders' equity, exclusive
of transactions with stockholders. The accumulated balance of foreign currency
translation adjustments is presented in the consolidated financial statements as
"accumulated other comprehensive income or loss".
Segment Reporting
In 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires that a public company
report annual and interim financial and descriptive information about its
reportable operating segments. Operating segments, as defined, are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 allows aggregation
of similar operating segments into a single operating segment if the businesses
are considered similar under the criteria of this statement. Management believes
the Company meets the aggregation criteria for its operating segments.
Reclassification
Certain reclassifications have been made to conform 1998 and 1997 financial
statements to the presentation in 1999. The reclassifications had no effect on
net income.
3. NOTES PAYABLE AND LONG-TERM DEBT
On November 19, 1999, the Company entered into a Credit and Security Agreement
with Wells Fargo Business Credit, Inc. ("Wells Fargo"), pursuant to which Wells
Fargo agreed to provide a credit facility of up to $8,650,000 in debt (the "Debt
Facility"). The Debt Facility has a three-year term and is made up of a
revolving credit facility and a $150,000 term note.
Proceeds of the closing of the Debt Facility in the amount of $6,954,828 were
used to pay all amounts due and owing by the Company pursuant to the Loan and
Security Agreement, as amended, by and between the Company and FINOVA Capital
Corporation ("FINOVA") and the subordinated convertible debt (the "Subordinated
Debt") between the Company and The Schlinger Foundation. At closing, the
Company's revolving line of credit and term loan facilities with FINOVA in the
principal amounts of $4,721,925 and $1,171,667, respectively, were satisfied in
their entirety, as well as the Subordinated Debt with The Schlinger Foundation
in the principal amount of $1,000,000. The Company used the remaining proceeds
to pay certain closing and financing costs.
At December 31, 1999 and 1998, the amounts outstanding under the above
agreements and other long-term debt consisted of the following:
1999 1998
---- ----
Credit and Security Agreement with Wells Fargo - collateralized by all of the
assets of the Company; payable as follows:
Revolving Note dated November 19, 1999 in the maximum principal amount
of $8,500,000 with revolving features as more fully described below -
interest due monthly at prime plus 1/2% (9.0% at December 31,
1999); matures November 30, 2002 $5,818,652 -
Term Note dated November 19, 1999 in the original principal amount of
$150,000 -- $30,000 monthly principal payments plus interest at prime
plus 1/2% (9.0% at December 31, 1999); matures May 1, 2000
150,000 -
23
Loan and Security Agreement with FINOVA - collateralized by all of the assets of
the Company as well as a pledge of 3,000,000 shares of the Company's common
stock collectively owned by two of the Company's executive officers; payable as
follows:
Promissory Note (Revolving Credit Loan) dated November 21, 1997 --
interest due monthly at prime plus 1%; repaid November 30, 1999 - $3,597,988
Promissory Note (Term Loan A) dated November 21, 1997 in the original
principal amount of $400,000 -- $6,667 monthly principal payments plus
interest at prime plus .75%; repaid November 30, 1999 - 320,000
Promissory Note (Term Loan C) dated November 21, 1997 in the original
principal amount of $1,500,000 -- $25,000 monthly principal payments
plus interest at prime plus 3%; repaid November 30, 1999 - 1,200,000
Subordinated Debenture in the original principal amount of $1,000,000; partially
convertible; secured by a pledge of 2,666,666 shares of the Company's common
stock owned by another executive officer - monthly interest
payments at 13%; repaid November 30, 1999 - 1,000,000
Capital Leases secured by computer equipment - total monthly principal and
interest payments of $9,324 at approximately 12% interest; maturing in
February through August of 2002 214,769 82,728
-------------- --------------
6,183,421 6,200,716
Less - Current maturities (see below) 6,061,735 6,139,327
-------------- --------------
$121,686 $ 61,389
============== ==============
The current portion of long-term debt for 1999 includes the Wells Fargo
Revolving Credit Loan of $5,818,652, although this obligation does not mature
until November 30, 2002. The classification of this debt was attributable to an
accounting rule that requires a revolving credit agreement that includes both a
subjective acceleration clause and a requirement to maintain an arrangement,
whereby cash collections from the borrower's customers directly reduce the debt
outstanding, to be classified as a short-term obligation (Emerging Issues Task
Force Issue 95-22). A covenant of the Credit Facility is that collections from
customers are to be deposited into a cash collateral account that directly pays
down the Revolving Credit Loan. The balance in this account comprises the
restricted cash on the Company's balance sheet. Because of this arrangement and
the fact that the credit agreement contains a clause that would allow
acceleration of payment of the debt in case of a "material adverse change", this
rule applies. Management does not believe that any such acceleration will occur.
The Company periodically has outstanding letters of credit for inventory
purchase commitments with terms ranging from sight to 90 days. As of December
31, 1999, there were no letters of credit outstanding.
Pursuant to the Credit and Security Agreement with Wells Fargo, the overall
combined borrowings under the Revolving Credit Loan and outstanding balance on
letters of credit is limited to a combined amount of $8,500,000. Of the
$8,500,000 limit, letters of credit cannot exceed $500,000. The unused portion
of the letter of credit limit can be utilized for borrowings, up to the limits
imposed for the indebtedness. Total borrowings under this arrangement are
subject to a percentage of trade accounts receivable and inventory reduced by
the outstanding balance of letters of credit and any required reserves. The
unused portion of the credit facility at December 31, 1999 was $508,410.
The terms of the Credit Facility contain various covenants which among other
things require the Company to maintain a certain level of income and book net
worth, limit capital expenditures, and require the maintenance of certain debt
service coverage ratios. Other covenants prohibit the Company from incurring
indebtedness except as permitted by the terms of the Credit Facility, from
declaring or paying cash dividends upon any of its stock and from entering into
any new business or making material changes in any of the Company's business
objectives, purposes or operations.
Scheduled maturities of the Company's notes payable and long-term debt are as
follows:
2000 $ 243,083
2001 108,661
2002 5,831,677
2003 -
-------------
$ 6,183,421
=============
24
4. EMPLOYEE BENEFIT PLAN
The Company has an Employee Stock Ownership Plan (the "Plan") for employees with
at least one year of service (as defined by the Plan) and who have reached their
21st birthday. Under the Plan, the Company makes annual cash or stock
contributions to a trust for the benefit of eligible employees. The trust
invests in shares of the Company's common stock. The amount of the Company's
annual contribution is discretionary. Benefits under the Plan are 100% vested
after three years of service and are payable upon death, disability or
retirement. Vested benefits are payable upon termination of employment.
The Company applies Statement of Position 93-6 (SOP 93-6"), "Employers'
Accounting for Employee Stock Ownership Plans," of the Accounting Standards
Division of the American Institute of CPAs. Contributions made during 1994 and
1995 in the amount of $99,962 and $226,222, respectively, represented securities
acquisition loans. In accordance with SOP 93-6, securities purchased with these
loans were recorded as unearned ESOP shares. The unearned ESOP share account is
reduced by the cost of the shares when they are committed to be released to
participants as payments are made on the loans using the principal and interest
method. Compensation expense is measured using the average fair market value
when shares are committed to be released to the employee. The Company
contributed $208,214; $125,408; and $50,910 in cash as current year
contributions to the plan during 1999, 1998 and 1997, respectively, and
recognized compensation expense related to these payments of $208,214; $42,046;
and $53,968 in 1999, 1998, and 1997, respectively. Furthermore, on January 21,
1999, the Company made an additional contribution to the Plan for December 1998
in the amount of $261,920. As a result of this contribution, the Company
recognized an additional compensation expense of $10,538 during 1998 relating to
the Plan.
The following table summarizes the number of shares held by the Plan and the
market value as of December 31, 1999, 1998 and 1997:
No. of Shares Market Value
------------- ------------
1999 1998 1997 1999 1998 1997
----- ---- ---- ---- --- ----
Allocated 598,132 692,606 652,609 $486,281 $ 173,152 $ 326,305
Unearned - - 54,262 - - 27,131
------------------------------ ---------------------------------------
Total 598,132 692,606 706,871 $486,281 $ 173,152 $ 353,436
============================== =======================================
The Company currently offers no postretirement or postemployment benefits to its
employees.
5. INCOME TAXES
The provision for income taxes consists of the following:
1999 1998 1997
---- ---- ----
Current provision (benefit):
Federal $ 370,053 $ (60,240) $ 174,469
State 207,171 (12,340) 39,918
------------ ------------ ------------
577,224 (72,580) 214,387
------------ ------------ ------------
Deferred provision (benefit):
Federal (2,373) (10,900) 14,185
State - (2,044) 2,660
------------ ------------ ------------
(2,373) (12,944) 16,845
------------ ------------ ------------
$ 574,851 $ (85,524) $ 231,232
============ ============ ============
25
The income tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities are as follows:
1999 1998
---- ----
Deferred income tax assets:
Allowance for doubtful accounts $ 66,453 $ 18,562
Capitalized inventory costs 85,175 71,366
Accrued expenses, reserves, and other 8,537 12,084
Net operating loss carryforwards - 88,000
----------------- -----------------
Total deferred income tax assets 160,165 190,012
----------------- -----------------
Deferred income tax liabilities:
Property and equipment depreciation 83,598 99,332
Goodwill and other intangible assets amortization 11,337 9,753
Tax effect of translation adjustment and other 2,845 -
----------------- -----------------
Total deferred income tax liabilities 97,780 109,085
----------------- -----------------
Net deferred tax asset (liability) $ 62,385 $ 80,927
================= =================
The effective tax rate differs from the statutory rate as follows:
1999 1998 1997
---- ---- ----
Statutory rate 34% (34%) 34%
State and local taxes 20% (7%) 10%
Non-deductible goodwill amortization 8% 67% 26%
ESOP transaction 0% (112%) 0%
Other (5%) 17% 7%
---- ---- ----
Effective rate 57% (69%) 77%
==== ===== ====
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company's primary office facility and warehouse are leased under a five-year
lease agreement that expires in March 2003. Rental agreements for the
sales/distribution units expire on dates ranging from March 2000 to September
2004. The Company's lease agreement for the manufacturing facility in Long
Island City, New York, expires on June 30, 2003.
Rent expense on all operating leases for the years ended December 31, 1999, 1998
and 1997, was $1,047,882; $1,017,491; and $1,036,892, respectively.
Capital Leases
The Company leases certain computer equipment under capital lease agreements.
Assets subject to the agreements totaling $346,601 and $129,108 and related
accumulated depreciation of $108,608 and $42,838 are included in property and
equipment as of December 31, 1999 and 1998, respectively.
Commitments
Future minimum lease payment under capital and noncancelable operating leases at
December 31, 1999 were as follows:
Capital Operating
Leases Leases
------ ------
Year ending December 31:
2000 $ 108,898 $ 980,561
2001 111,058 878,762
2002 32,837 837,270
2003 - 511,697
2004 - 143,759
------------- -----------
Total minimum lease payments 252,793 $3,352,049
===========
Less amount representing interest 38,024
-------------
Present value of net minimum capital lease payments 214,769
Less current installments of minimum capital lease payments 93,083
-------------
Long-term capital lease obligations, excluding current installments $ 121,686
=============
26
Litigation
The Company has litigation in the ordinary course of its business and
operations. The Company does not expect the outcome of any current litigation to
have a material impact on its financial position and results of operations.
7. SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK
Major Customers
The Company's revenues are derived from a diverse group of customers primarily
involved in the sale of leather crafts and western apparel items. While no
single customer accounts for more than 10% of the Company's consolidated
revenues in 1999, 1998 and 1997, sales to the Company's five largest customers
represented 19%, 18% and 19%, respectively, of consolidated revenues in those
years. While management does not believe the loss of one of these customers
would have a negative impact on the Company's operations, it does believe the
loss of several of these customers simultaneously or a substantial reduction in
sales generated by them could temporarily affect the Company's operating
results.
Major Vendors
The Company purchases a significant portion of its inventory through one
supplier. Due to the number of alternative sources of supply, loss of this
supplier would not have an adverse impact on the Company's operations.
Credit Risk
Due to the large number of customers comprising the Company's customer base,
concentrations of credit risk with respect to customer receivables are limited.
At December 31, 1999 and 1998, 29% and 24%, respectively, of the Company's
consolidated accounts receivable were due from three nationally recognized
retail chains. The Company does not generally require collateral for accounts
receivable, but performs periodic credit evaluations of its customers and
believes the allowance for doubtful accounts is adequate. It is management's
opinion that if any one or a group of customer receivable balances should be
deemed uncollectable, it would not have a material adverse effect on the
Company's results of operations and financial condition.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
1999 1998 1997
---- ---- ----
Numerator:
Net income (loss) $ 435,056 $ (39,191) $ 70,292
---------------- ----------------- ----------------
Numerator for basic and diluted earnings per
share 435,056 (39,191) 70,292
Denominator:
Denominator for basic earnings per share --
weighted-average shares 9,853,161 9,803,887 9,789,358
Effect of dilutive securities:
Stock options 5,019 - 25
Warrants 31,918 - 2,182
---------------- ----------------- ----------------
Dilutive potential common shares 36,937 - 2,207
---------------- ----------------- ----------------
27
Denominator for diluted earnings per share --
adjusted weighted-average shares and assumed
conversions 9,890,098 9,803,887 9,791,565
================ ================= ================
Basic earnings per share $ 0.04 $ (0.00) $ 0.01
================ ================= ================
Diluted earnings per share $ 0.04 $ (0.00) $ 0.01
================ ================= ================
For additional disclosures regarding the employee stock options and the
warrants, see note 9. Unexercised employee and director stock options to
purchase 150,000 and 543,000 shares of common stock as of December 31, 1999 and
1998, respectively, were not included in the computations of diluted earnings
per share ("EPS") because the options' exercise prices were greater than or
equal to the average market prices of the common stock and, therefore, the
effect would be antidilutive. The net effect of converting stock options to
purchase 447,000 shares of common stock at option prices less than the average
market prices has been included in the computation of diluted EPS for the year
ended December 31, 1999.
9. STOCKHOLDERS' EQUITY
Stock Option Plans
1995 Stock Option Plan
In connection with its 1995 Stock Option Plan for officers and key management
employees, the Company has outstanding options to purchase its common stock. The
plan provides for the granting of either qualified incentive stock options or
non-qualified options at the discretion of the Compensation Committee of the
Board of Directors. Options are granted at the fair market value of the
underlying common stock at the date of grant and vest over a five-year period.
The Company has reserved 1,000,000 shares of common stock for issuance under
this plan.
1995 Director Non-Qualified Stock Option Plan
In connection with its 1995 Director Non-qualified Stock Option Plan for
non-employee directors, the Company has outstanding options to purchase its
common stock. The plan provides for the granting of non-qualified options at the
discretion of the Compensation Committee of the Board of Directors. Options are
granted at the fair market value of the underlying common stock at the date of
grant and vest after six months. The Company has reserved 100,000 shares of
common stock for issuance under this plan.
Stock Option Summary
All options expire ten years from the date of grant and are exercisable at any
time after vesting. Of the combined 1,100,000 shares available for issuance
under the two plans, at December 31, 1999, 1998 and 1997, there were 647,000;
557,000; and 534,000; respectively, in un-optioned shares available for future
grants.
A summary of stock option transactions for the years ended December 31, 1999,
1998 and 1997, is as follows:
1999 1998 1997
----------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
------------ ----------- ----------- ----------- ---------- ----------
Outstanding at January 1 543,000 $0.758 566,000 $0.874 510,000 $ 2.653
Granted * 10,000 0.690 108,000 0.500 456,000 0.805
Forfeited or expired (100,000) 0.656 (131,000) 1.047 - -
Exchanged * - - - - (400,000) 3.063
Exercised - - - - - -
------------ ----------- ----------- ----------- ---------- ----------
Outstanding at December 31 453,000 $0.779 543,000 $0.758 566,000 $ 0.874
============ =========== =========== =========== ========== ==========
Exercisable at end of year 318,000 $0.813 255,000 $0.838 190,000 $ 0.908
============ =========== =========== =========== ========== ==========
Weighted-average fair value of
options granted during year $ 0.45 $ 0.31 $ 0.31
============ =========== ==========
28
* In 1997, options originally granted in 1995 were canceled and reissued. This
action was taken to provide incentive to and in order to retain the Company's
key management personnel in light of the severe decline in the market price for
the Company's common stock.
The following table summarizes outstanding options into groups based upon
exercise price ranges at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------- --------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Option Exercise Maturity Option Exercise Maturity
Exercise Price Range Shares Price (Years) Shares Price (Years)
--------------------
------------- ---------- ----------- ------------- ----------- -----------
$0.75 or Less 97,000 $ 0.578 8.21 32,000 $0.590 8.10
More than $0.75 and
Less Than $1.00 350,000 0.813 6.25 280,000 0.813 6.25
More than $1.00 6,000 2.021 6.42 6,000 2.021 6.42
------------- ---------- ----------- ------------- ----------- -----------
453,000 $ 0.779 6.67 318,000 $ 0.813 6.44
============= ========== =========== ============= =========== ===========
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method. The fair value for
these options was estimated at the date of grant using the Black Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rates of 5.88% in 1999; 5.00% in 1998; and 6.64% in 1997; dividend
yields of 0% for all years; volatility factors of .851 for 1999; .693 for 1998,
and .550 for 1997; and an expected life of the valued options of 5 years for all
years other than the exchanged options reissued in 1997 which had an expected
remaining life of 4 years.
Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility, and changes in these input
assumptions can materially affect the fair value estimate they produce. Because
of this, it is management's opinion that existing models do not necessarily
provide a reliable single measure of fair value for the Company's stock options.
For pro forma disclosures, the estimated fair values determined by the model are
being amortized to expense on a straight-line basis over the options vesting
period as adjusted for estimated forfeitures. The Company's pro forma
information follows:
1999 1998 1997
------------ ------------ ------------
Pro forma net income (loss) $ 277,780 $ (310,098) $ (76,117)
Pro forma net income (loss) per common share $ 0.03 $ (0.02) $ (0.01)
Pro forma net income (loss) per common share--Assuming
Dilution $ 0.03 $ (0.02) $ (0.01)
Warrants
In connection with the issuance of the Subordinated Debenture discussed in note
3 above, the Company issued warrants to acquire up to 100,000 shares of Common
Stock at $.54 per share to certain unrelated individuals. The warrants may be
exercised at anytime until expiration on November 21, 2002. The fair value for
these warrants was estimated at the date of grant using the Black Scholes option
pricing model with the following assumptions: risk-free interest rate of 6.5%;
dividend yield of 0%; volatility factor of .550; and an expected life of 3 years
Warrants to acquire up to 200,000 shares of common stock at approximately $0.44
per share were issued in conjunction with a consulting agreement to an unrelated
individual in August 1998. The warrants may be exercised at anytime until
expiration on August 3, 2003. The fair value for these warrants was estimated at
the date of grant using the Black Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of 5.0%;
dividend yield of 0%; volatility factor of .645; and an expected life of 3
years.
29
Notes Receivable Secured by Common Stock
During 1996, the Company purchased certain notes from NationsBank that are
collateralized by the Company's common stock. These notes relate to shares
issued under the Company's 1993 Non-Qualified Incentive Stock Option Plan. These
notes, as renewed in 1997, are due from certain individuals including officers
and other members of management, require monthly payments, and mature on
December 31, 2000.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable-trade and accounts payable
The carrying amount approximates fair value because of the short maturity of
those instruments.
Notes payable and long-term debt
The interest rates on the Company's notes payable and long-term debt fluctuate
with changes in the prime rate and are the rates currently available to the
Company; therefore, the carrying amount of those instruments approximates their
fair value.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
- ----------------------------- ----------------------------------------------------------------------
Net sales $ 5,513,000 $ 6,539,950 $7,625,169 $7,486,280
Gross profit 2,358,889 2,813,768 3,445,060 3,638,914
Net income (loss) (92,191) 6,708 272,565 247,974
Net income (loss) per
common share:
Basic (0.01) - 0.03 0.02
Diluted (0.01) - 0.03 0.02
Weighted average number
of common shares
outstanding:
Basic 9,853,161 9,853,161 9,853,161 9,853,161
Diluted 9,853,161 9,859,988 9,889,734 9,934,809
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- ----------------------------- ----------------------------------------------------------------------
Net sales $ 5,710,832 $ 5,471,463 $ 5,628,895 $ 5,352,804
Gross profit 2,414,694 2,426,840 2,482,248 2,411,888
Net income (loss) (88,528) 5,914 76,967
(33,544)
Net income (loss) per common share:
Basic (0.01) - - 0.01
Diluted (0.01) - - 0.01
Weighted average number
of common shares
outstanding:
Basic 9,799,404 9,802,259 9,805,385 9,808,501
Diluted 9,799,404 9,802,259 9,805,385 9,808,501
30
THE LEATHER FACTORY, INC.
SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 52,000 $ 28,000 $ 54,000
Additions (reductions) charged to income 157,000 3,000 (4,000)
Balances written off, net of recoveries (32,000) 21,000 (22,000)
-------------------------------------------
Balance at end of year $ 177,000 $ 52,000 $ 28,000
===========================================
31
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Leather Factory, Inc.
We have audited the accompanying consolidated balance sheets of The Leather
Factory, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years then ended. Our audits also included the financial statement schedule
referred to in the index at Item 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Leather Factory, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the two years then
ended, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Hein + Associates LLP
Dallas, Texas
February 8, 2000
32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Leather Factory, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of The Leather Factory, Inc. for the year
ended December 31, 1997. Our audit also included the financial statement
schedule referred to in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of The Leather Factory, Inc. for the year ended December 31, 1997, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Fort Worth, Texas
March 4, 1998
33
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information required by this item is incorporated by reference to the
material appearing under the heading "Election of Directors" and "Executive
Officers of the Company" in the Proxy Statement for the 2000 Annual Meeting of
Stockholders.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation" in the Proxy
Statement for the 2000 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this item is incorporated by reference to the
material appearing under the heading "Security Ownership of Certain Beneficial
Owners and Management" and "Certain Transactions" in the Proxy Statement for the
2000 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
Information required by this item is incorporated by reference to the
material appearing under the heading "Certain Transactions" in the Proxy
Statement for the 2000 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial statements and financial statement schedules
---------------------------------------------------------
The financial statements and schedule listed in the accompanying index
to consolidated financial statements at Item 8 are filed as part of this Report.
2. Exhibits
-----------
The exhibits listed on the accompanying Exhibit Index, which
immediately precedes such exhibits, are filed or incorporated by reference as
part of this Report and such Exhibit Index.
(b) Reports on Form 8-K
On December 16, 1999, the Company filed a report on Form 8-K (Items 5
and 7(c)) describing the Credit and Security Agreement with WFBC.
34
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Company caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: March 15, 2000 By: /s/ Wray Thompson
-------------- ---------------------------------
Wray Thompson
Chairman of the Board, President,
Chief Executive Officer, and
Chief Accounting Officer
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Wray Thompson Chairman of the Board March 15, 2000
- -----------------------------
Wray Thompson
/s/ Ronald C. Morgan Director March 15, 2000
- -----------------------------
Ronald C. Morgan
/s/ Robin L. Morgan Director March 15, 2000
- -----------------------------
Robin L. Morgan
/s/ William M. Warren Director March 15, 2000
- -----------------------------
William M. Warren
/s/ H.W. Markwardt Director March 15, 2000
- -----------------------------
H. W. Markwardt
/s/ Joseph R. Mannes Director March 15, 2000
- -----------------------------
Joseph R. Mannes
/s/ Anthony C. Morton Director March 15, 2000
- -----------------------------
Anthony C. Morton
/s/ John Tittle, Jr. Director March 15, 2000
- -----------------------------
John Tittle, Jr.
35
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of The Leather Factory, Inc.,
filed as Exhibit 3.1 to the Registration Statement on Form
SB-2 of The Leather Factory, Inc. (Commission File No.
33-81132) filed with the Securities and Exchange Commission on
July 5, 1994, and incorporated by reference herein.
3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to
the Registration Statement on Form SB-2 of The Leather
Factory, Inc. (Commission File No. 33-81132) filed with the
Securities and Exchange Commission on July 5, 1994, and
incorporated by reference herein.
4.1 Loan and Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation, filed as Exhibit 4.1 to the Current
Report on Form 8-K of The Leather Factory, Inc. (Commission
File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference
herein.
4.2 Revolving Note (Revolving Credit Loan) dated November 21,
1997, in the principal amount of $7,000,000, payable to the
order of FINOVA Capital Corporation, which matures December 1,
1999 filed as Exhibit 4.2 to the Current Report on Form 8-K of
The Leather Factory, Inc. (Commission File No. 1-12368) filed
with the Securities and Exchange Commission on February 6,
1998, and incorporated by reference herein.
4.3 Term Loan A Note (Term Loan A) dated November 21, 1997, in the
principal amount of $400,000, payable to the order of FINOVA
Capital Corporation, which matures December 1, 1999 filed as
Exhibit 4.3 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on February 6, 1998, and
incorporated by reference herein.
4.4 Term Loan C Note (Term Loan C) dated November 21, 1997, in the
principal amount of $1,500,000, payable to the order of FINOVA
Capital Corporation, which matures December 1, 1999 filed as
Exhibit 4.5 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on February 6, 1998, and
incorporated by reference herein.
4.5 Subordination Agreement dated November 21, 1997, by and
between FINOVA Capital Corporation, The Schlinger Foundation,
The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc.,
an Arizona corporation, Hi-Line Leather & Manufacturing
Company, a California corporation, and Roberts, Cushman &
Company, Inc., a New York corporation filed as Exhibit 4.6 to
the Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and
Exchange Commission on February 6, 1998, and incorporated by
reference herein.
4.6 Pledge Agreement dated November 21, 1997, by and between
Ronald C. Morgan and Robin L. Morgan and FINOVA Capital
Corporation filed as Exhibit 4.7 to the Current Report on Form
8-K of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on February
6, 1998, and incorporated by reference herein.
4.7 Patent Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation filed as Exhibit 4.8 to the Current Report
on Form 8-K of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission on
February 6, 1998, and incorporated by reference herein.
36
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX (CONTINUED)
Exhibit
Number Description
------- -----------
4.8 Trademark Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation filed as Exhibit.4.9 to the Current Report
on Form 8-K of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission on
February 6, 1998, and incorporated by reference herein.
4.9 Copyright Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation filed as Exhibit 4.10 to the Current
Report on Form 8-K of The Leather Factory, Inc. (Commission
File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference
herein.
4.10 Promissory Note (Subordinated Debenture) dated November 14,
1997, in the principal amount of $1,000,000, payable to the
order of The Schlinger Foundation, which matures December 1,
1999 filed as Exhibit 4.11 to the Current Report on Form 8-K
of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on February
6, 1998, and incorporated by reference herein.
4.11 Pledge and Security Agreement dated November 14, 1997, by and
between The Schlinger Foundation and J. Wray Thompson, Sr.
filed as Exhibit 4.12 to the Current Report on Form 8-K of The
Leather Factory, Inc. (Commission File No. 1-12368) filed with
the Securities and Exchange Commission on February 6, 1998,
and incorporated by reference herein.
4.12 Amendment to Loan and Security Agreement dated May 13, 1998,
by and between The Leather Factory, Inc., a Delaware
corporation, The Leather Factory, Inc., a Texas corporation,
The Leather Factory, Inc., an Arizona corporation, Hi-Line
Leather & Manufacturing Company, a California corporation,
Roberts, Cushman & Company, Inc., a New York corporation, and
FINOVA Capital Corporation effective as of March 31,1998 filed
as Exhibit 4.15 to the Quarterly Report on Form 10-Q of The
Leather Factory, Inc. (Commission File No. 1-12368) filed with
the Securities and Exchange Commission on May 15, 1998, and
incorporated by reference herein.
4.13 The Leather Factory, Inc. Stock Purchase Warrant for 200,000
shares common stock, $.0024 par value issued to Evert I.
Schlinger dated August 3, 1998 and terminating on August 3,
2003, filed as Exhibit 4.13 to the Quarterly Report on Form
10-Q of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission
November 12, 1998, and incorporated by reference herein.
4.14 Credit and Security Agreement dated November 22, 1999, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Roberts, Cushman &
Company, Inc., and Hi-Line Leather & Manufacturing and Wells
Fargo Business Credit, Inc., filed as Exhibit 4.1 to the
Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and
Exchange Commission on December 16, 1999, and incorporated by
reference herein.
4.15 Revolving Note (Revolving Credit Loan) dated November 22,
1999, in the principal amount of $8,500,000, payable to the
order of Wells Fargo Business Credit, Inc., which matures
November 30, 2002, filed as Exhibit 4.2 to the Current Report
on Form 8-K of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission on
December 16, 1999, and incorporated by reference herein.
37
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX (CONTINUED)
Exhibit
Number Description
------ -----------
4.16 Term Note dated November 22, 1999, in the principal amount of
$150,000, payable to the order of Wells Fargo Business Credit,
Inc., which matures May 1, 2000, filed as Exhibit 4.3 to the
Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and
Exchange Commission on December 16, 1999, and incorporated by
reference herein.
4.17 Copyright Security Agreement dated November 22, 1999, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Roberts, Cushman &
Company, Inc., and Hi-Line Leather & Manufacturing and Wells
Fargo Business Credit, Inc., filed as Exhibit 4.4 to the
Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and
Exchange Commission on December 16, 1999, and incorporated by
reference herein.
10.1 Letter Agreement for Consulting Services dated July 24, 1998,
by and between The Leather Factory, Inc. and Evert I.
Schlinger, filed as Exhibit 4.13 to the Quarterly Report on
Form 10-Q of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission
November 12, 1998, and incorporated by reference herein.
16 Letter addressed to the Securities and Exchange Commission
dated August 5, 1998, from the Company's former auditors,
Ernst & Young LLP, relative to their agreement with the
statements made in Item 4 of to the Current Report on Form
8-K/A of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission on
August 6, 1998, and incorporated by reference herein.
21.1 Subsidiaries of the Company, filed as Exhibit No. 22.1 to the
1995 Annual Report on Form 10-KSB of The Leather Factory, Inc.
(Commission File No. 1-12368), filed with the Securities and
Exchange Commission on March 28, 1996, and incorporated herein
by reference.
*23.1 Consent of Hein + Associates LLP dated March 27, 2000.
*23.2 Consent of Ernst & Young LLP dated March 27, 2000.
*27.1 Financial Data Schedule
------------
*Filed herewith.
38
EXHIBIT 23.1
39
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-81214) pertaining to the Employee Stock Ownership Plan and Trust of
The Leather Factory, Inc. and the Registration Statement (Form S-8 No.
333-07147) pertaining to the 1995 Stock Option Plan of The Leather Factory, Inc.
of our report dated February 8, 2000, with respect to the consolidated financial
statements and schedule of The Leather Factory, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1999.
HEIN + ASSOCIATES LLP
Dallas, Texas
March 27, 2000
40
EXHIBIT 23.2
41
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-81214) pertaining to the Employee Stock Ownership Plan and Trust of
The Leather Factory, Inc. and the Registration Statement (Form S-8 No.
333-07147) pertaining to the 1995 Stock Option Plan of The Leather Factory, Inc.
of our report dated March 4, 1998, with respect to the 1997 consolidated
financial statements and schedule of The Leather Factory, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1999.
ERNST & YOUNG LLP
Fort Worth, Texas
March 27, 2000
42
EXHIBIT 27.1